This one is very similar to Requirement Four from Question 2 where we have to

# This one is very similar to requirement four from

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This one is very similar to Requirement Four from Question 2, where we have to do trial an error First, I just randomly tried 10% 10.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 22,727.27 20,661.16 18,782.87 17,075.34 15,523.03 14,111.85 The result is that the Sum is positive, therefore, we must increase the % 20.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 20,833.33 17,361.11 14,467.59 12,056.33 10,046.94 8,372.45 ANSWER = Yes, David should Invest, the NPV is \$27,737.28 and the Investment is 20,000 which NPV = -130,400 + 25,000 / ((1+r)^1) + 25,000 / ((1+r)^2) + 25,000 / ((1+r)^3) + The result is that its negative, therefore we must decrease the %, somewhere in the middle 15.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 21,739.13 18,903.59 16,437.91 14,293.83 12,429.42 10,808.19 The result is still negative, but very close, we will decrease the % by 1 14.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 21,929.82 19,236.69 16,874.29 14,802.01 12,984.22 11,389.66 Result, very close to 14%, just rounding, so go with 14% ANSWER = The IRR is approximately 14%, there for the Investment should be made. ATE OF RETURN 00 is paid back? was paid back and in year 3, the ach flow is \$5000. We only need \$3000 more 3,000 / \$5,000 = 0.60 of the year Project A 5 yea Project B 5 ye ,000 / \$6,000 = 0.50 of the year rapid payback period, Project B is a better choice as it pays back your investment quicker. n the long run, Project A is an overall better choice l Investment In the Question, it stated that the Investment was depreciable, but did not g or to receive \$24,000 per year for 20 years. Wilma's required rate of return is 8 percent. ars and to find out if the NPV is higher or lower then the lump sum of 225,000 er then the \$225,000 lump sum better choice. In the original Formula, it had the sum of all this and then minus the initial investment. In this case 0,635.54 higher then the lump sum payment option) r to make the NPV = 0 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 12,828.95 11,662.68 10,602.44 9,638.58 23,214.18 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 6,977.04 5,814.20 4,845.17 4,037.64 -25,588.20 h is a gain of \$7,737.28 25,000 / ((1+r)^4) + (25,000 / ((1+r)^5) + (25,000 / ((1+r)^6) + (25,000 / ((1+r)^7) + (25,000 / 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 9,398.43 8,172.54 7,106.56 6,179.62 -4,930.78 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 9,990.93 8,763.98 7,687.70 6,743.60 2.89 ar cash flow = \$32,000 les Investment of \$10,000 = \$22,000 ear cash flow = \$19,000 les Investment of \$10,000 = \$9,000 I think he's looking for the exact answer I wrote. Proj better for Rapid payback, Project A is better for an overa over 5 years give specs. So you assume it is full depreciable, with 0 salvage value e, you could argue that 225,000 is the initial investment ((1+r)^8) + (25,000 / ((1+r)^9) + (25,000 / ((1+r)^10)  ject B is all payback    FORMULA FOR NPV : NPV = ∑ {Net Period Cash Flow/(1+R)^T} - Initial Investment Where: Net Period Cash Flow = Cash flow for each year T = number of periods (in this case, each year will represent the T, Year 1 = 1, year 2 = 2 et FORMULA FOR CASH FLOW (CF) = CF (df) - I = NPV CF = Cash Flow df = Discount Factor I = Initial Investment NPV = Net Present Value FORMULA for Average Rate of Return (ARR)= (Yearly Cash Inflow - yearly Depreciation) / R = Rate of return OR Discount Rate PAY BACK FORMULA = Initial Investment / Cash flow per period tc.) / Initial Investment #### You've reached the end of your free preview.

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